Chile’s peso is poised to reverse its biggest decline in five months as a measure of the Latin American nation’s trade balance signals improvement.
Copper relative to crude oil has risen to the highest level since June. The Andean country depends on the metal for more than half of its exports while it buys almost all of the oil it consumes. The last time this happened was in June and September 2012, and the peso rose 2.2 percent on average. Trading patterns in the currency indicate the peso’s 3.2 percent drop in the past month will be hard to sustain.
“The depreciation is a bit stretched,” Guilherme Marone, a strategist at Deutsche Bank AG, the world’s largest currency trader, said in a phone interview from New York yesterday. “Copper prices are stable. It doesn’t justify such a big decline in a short period of time. The peso is a candidate for a retracement trade.”
An economic recovery in China, Chile’s main trading partner, will stabilize copper prices and benefit the peso, which is among the cheapest currencies in developing nations, according to Morgan Stanley. The peso declined the most after Brazil’s real among 31 major dollar counterparts tracked by Bloomberg over the past month as the Andean country’s central bank unexpectedly cut interest rates and the economy slowed.
The peso declined 0.5 percent yesterday to a three-month low of 515.16 per dollar as a report showed the economy grew in September at the slowest pace in four months and minutes of the central bank’s Oct. 17 meeting showed policy makers voted unanimously to reduce borrowing costs.
Some measures indicate a reversal in the peso may be coming. The “k-line” of stochastics, which gauges current price relative to highs and lows, has increased to 97, above the 80 threshold deemed as oversold for the peso, according to data compiled by Bloomberg. A signal to buy the peso would be confirmed if the k-line crossed below its own moving average of 92.
While the Andean nation’s economy has slowed, trade prospects have brightened. The price of copper, which makes up more than half of Chile’s exports, has risen 7 percent in the second half of the year to $3.2585 a pound on speculation demand will rise as growth in the world’s largest economies accelerate.
Crude oil, which makes up 14 percent of Chilean imports, has plunged 13 percent in the past two months to $93.64 a barrel as concern faded that the U.S. would intervene militarily in Syria. The copper-to-oil ratio has increased to 3.5 from a five-year low of 2.9 in July, according to data compiled by Bloomberg.
China, the largest buyer of Chile’s copper, said Nov. 2 that its services industry grew in October at the fastest pace this year, adding to evidence of the Asian nation’s rebound. Chile’s trade deficit will narrow to $116 million in October from $220 million in the previous month, according to the median estimate of eight economists surveyed by Bloomberg.
Chile’s central bank cut its target lending rate a quarter percentage point to 4.75 percent Oct. 17 as inflation and economic growth slowed. One policy maker said in minutes published yesterday that a weaker peso would be more desirable as the international outlook turns against emerging markets.
The implied yield money managers can earn by investing in the Chilean peso through the forwards market plunged after the central bank’s surprise rate cut. The 12-month yield fell to 4.37 percent on Nov. 5 from 4.84 percent before the rate cut.
While Barclays Plc.’s Sebastian Brown recommended on Nov. 4 that clients exit a trade to sell the peso, he expects that the currency will weaken to as low as 530 per dollar in a year as the economy slows.
“The gradual transition of the Chilean economy to a lower growth state” will weigh on the peso, Brown wrote in a research note.
The peso’s decline has made it the most-undervalued among 18 emerging-market currencies tracked by Morgan Stanley after the Polish zloty and the Colombian peso. At the current level, it is about 5 percent below its fair value of 490 per dollar, according to Morgan Stanley’s model.
Chilean exporters may take advantage of the peso’s weakness to buy the currency as a hedge, limiting further declines, according to Eugenio Cortes, the head of currency forwards at EuroAmerica Corredores de Bolsa SA.
“We may only get a couple more days of depreciation,” Cortes said.
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